The Fiduciary Relationship

Question 1

What is a fiduciary relationship?

Answer 1

Relationship where one party owes a single-minded duty of loyalty to the other (their principal)

Question 2

What are examples of fiduciary relationships?

Answer 2

• trustee and beneficiary
• solicitor and client
• company director and company
• agent and principal

Question 3

What are the two key fiduciary duties?

Answer 3

No conflict - a fiduciary must not put themselves in a position where their personal interests conflict with their duties to their principal

No-profit - a fiduciary must not obtain an unauthorised benefit as a result of their position as a fiduciary either for themselves of for a third party

Question 4

What is the purpose of the no conflict rule?

Answer 4

To ensure the fiduciary is thinking of only their principal.

If they are tempted to act in their own interests, they may not be doing the best for their principal.

Question 5

What is self-dealing?

Answer 5

Where trustee purchases assets from the trust or sells asset to the trust

Question 6

Why is there a conflict with self-dealing?

Answer 6

As trustee is acting for both sides of transaction.

Buyer will always be seeking the lowest price and seller will always be seeking the highest price.

Question 7

Can a trustee ever legally self-deal?

Answer 7

Yes - if authorised by the trust instrument

Question 8

What is the consequence of an unauthorised self-dealing transaction?

Answer 8

Transaction will be voidable - beneficiaries can seek to rescind it

Question 9

Can a trustee seek to get around this rule by incorporating a company and then selling trust property to that company?

Answer 9

No - this would still be self-dealing and transaction voidable

Question 10

What is fair-dealing?

Answer 10

Where trustee directly transacts with beneficiary to buy their beneficial interest under the trust

Question 11

Can a trustee ever legally do a fair-deal transaction?

Answer 11

Yes - provided they can demonstrate the transaction was conducted fairly.

Will be fair if full disclosure is made to beneficiary, trustee acted honestly and fairly and did not take advantage of their beneficiary

Question 12

What is the consequence of a transaction was not deemed to be fair instance of fair-dealing?

Answer 12

Transaction is voidable

Question 13

What happens if the fiduciary’s duties conflict because their duties to one principal conflicts with that of another?

Answer 13

There will be a conflict of interest and the trustee should not act

Question 14

When can trustees proceed with a transaction that gives rise to a potential conflict?

Answer 14

• If the transaction is authorised by the trust instrument creating the fiduciary relationship
• if not authorised by the trust instrument, fiduciary must obtain the fully informed consent of their principals

Question 15

What are the consequences of breach of the fiduciary not to conflict with the interests of the principal where there is a loss is caused to the principal?

Answer 15

The principal can sue the fiduciary personally for breach of fiduciary duty, who would be liable to compensate the principal

Question 16

What are the consequences of breach of the self-dealing or fair dealing rules?

Answer 16

Any transaction in breach is voidable and beneficiaries can seek rescission

Question 17

What are the consequences of breach of the fiduciary not to conflict with the interests of the principal where there is a profit to the fiduciary?

Answer 17

Any profit to the fiduciary can be recovered

Question 18

In what ways can a fiduciary breach the no-profit rules?

Answer 18

• directly - using the property of their principal to make a personal profit
• indirectly profiting from their role as a fiduciary
• exploiting an opportunity which has come to them as a result of their fiduciary position
• receiving a bribe or secret commission to influence the way in which they perform their role as fiduciary

Question 19

Where a trust holds shares in a company and a trustee is a director of that company, can the trustee keep any salary that comes with being a director?

Answer 19

Generally no - if trustee appointed director as direct result of being trustee then must pay over any renumeration received to trust

Can keep directors pay if:

• director because was independently appointed as such
• trust instrument authorises them keeping it or
• beneficiaries give their fully informed consent to them keeping the pay

Question 20

Can a trustee exploit an opportunity that comes to them as a result of them performing their role as trustee?

Answer 20

Generally no - they are the ‘one person in the world who cannot’ benefit from the opportunity (even if they act in the best interest of the trust and benefit the trust too)

Can only benefit if they trust instrument allows or they have the fully informed consent of all the beneficiaries

Question 21

What are the remedies beneficiaries can choose between when it comes breach of no-profit rule?

Answer 21

Can elect between

• account of profits
• constructive trust

Question 22

What is the remedy account of profits?

Answer 22

Beneficiaries will gain personal claim which requires the trustee to pay the principal an amount equivalent to the profit they have made

Question 23

What is the remedy of a constructive trust?

Answer 23

Profits made by the fiduciary are held on constructive trust for the benefit of the principal

Question 24

Why might a principal opt for the remedy of constructive trust over account of profits?

Answer 24

• constructive trust provides protection against the insolvency of the fiduciary. The fiduciary is able to identify an asset over which they have rights which rank above other creditors
• constructive trust also allows for the principal to trace into any assets acquired with the profit